Gran Tierra Energy Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Gran Tierra is an international oil and gas exploration and production company operating in Colombia and Ecuador. Amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Oil sales | $179.9 million | $168.4 million | $482.0 million | $548.8 million |
| Income (loss) before taxes | $46.9 million | $60.4 million | $93.0 million | $205.7 million |
| Net income (loss) | $6.5 million | $38.7 million | $(14.0) million | $105.8 million |
| Adjusted EBITDA (non-GAAP) | $119.2 million | $116.1 million | $306.4 million | $375.1 million |
| Funds flow from operations (non-GAAP) | $79.0 million | $93.7 million | $192.1 million | $284.7 million |
| Net production (NAR) | 26,776 BOPD | 23,472 BOPD | 26,506 BOPD | 23,175 BOPD |
- Q3 operating netback, a non-GAAP measure, was $126.7 million, or $52.18 per sales barrel, versus $124.1 million, or $57.38 per barrel, a year earlier. Nine-month netback was $332.2 million, or $46.30 per barrel, versus $424.7 million, or $67.55.
- Q3 operating expenses were $49.4 million ($20.33 per barrel); transportation costs were $3.8 million. Nine-month operating and transportation expenses were $139.2 million and $10.6 million, respectively. DD&A was $55.0 million in Q3 and $162.9 million for nine months.
- Income tax expense was $40.3 million in Q3 and $106.9 million for nine months; the nine-month effective tax rate was 115%, versus 49% in 2022. Management attributed the elevated rate primarily to nondeductible foreign-exchange adjustments and royalties, foreign taxes, and nondeductible stock compensation.
Cash, liquidity, and debt
- At September 30, cash and cash equivalents were $123.2 million; restricted cash was $8.2 million, including $7.1 million classified as long-term. Cash and cash equivalents were $126.9 million at December 31, 2022.
- Nine-month operating cash flow was $157.5 million, down from $355.8 million. Capital expenditures were $179.7 million, compared with $163.7 million in the prior-year period. Cash, cash equivalents, and restricted cash decreased by $1.9 million during the nine months.
- Reported debt at September 30 included $50.0 million drawn on the credit facility, $271.9 million of 6.25% Senior Notes due 2025, and $300.0 million of 7.75% Senior Notes due 2027; total debt including lease obligations and net of unamortized issuance costs was $636.5 million. The facility is floating-rate, secured by Colombian assets, and matures August 15, 2024. The company reported compliance with its financial covenants.
- Management stated that cash on hand and cash generated from operations were expected to provide sufficient liquidity for strategic objectives and the planned capital program over the next 12 months, based on current oil-price trends and production levels.
Material changes and notable events
- Q3 oil sales rose 7% year over year, supported by 14% higher net production, lower quality and transportation discounts, and use of Brent pricing for the delivery month rather than the following month. The average Brent price fell 12% year over year, and realized sales price per barrel declined 5%.
- Nine-month oil sales fell 12%, mainly reflecting a 20% decline in Brent prices and higher differentials, partly offset by 14% higher sales volumes. Nine-month funds flow from operations declined 33%.
- Operating costs increased year over year, including higher lifting costs associated with maintenance, power generation, and equipment rentals. Management also cited El Niño-related drought and higher Colombian power costs, as well as U.S.-dollar depreciation against the Colombian peso. Transportation costs rose with higher tariffs and new routes.
- The Suroriente operating contract was extended for 20 years from September 1, 2023. Gran Tierra paid $6.2 million and provided $123.0 million in letters of credit for committed capital investments over three years. Total letters of credit and other credit support were $220.1 million at quarter-end.
- After quarter-end, on October 20, the company completed exchanges of existing Senior Notes for $487.6 million of new 9.50% Senior Secured Notes due 2029 and paid $60.0 million in cash consideration. This financing transaction is subsequent to the September 30 balance-sheet date.
- The company completed a 1-for-10 reverse stock split in May 2023. Its share repurchase program reached its 10% limit and expired in May.
Outlook, risks, and contingencies
- The filing gives no quantified production, revenue, earnings, or capital-spending guidance. Management’s liquidity assessment depends on current oil-price trends and production levels.
- Key exposures include volatile Brent prices and crude differentials, Colombian peso movements, floating interest rates, operating and transportation disruptions, weather-related power costs, and political or social disruption in South America. The company also depends heavily on a major Colombian customer, which represented 96% of Q3 sales volumes.
- The credit facility has covenant requirements and a 2024 maturity; the filing says the company was compliant at September 30. The facility’s draw availability was extended through December 31, 2023, with a possible additional $50 million subject to lender approval.
- Gran Tierra reported pending lawsuits and claims but stated that their resolution was not expected to materially adversely affect its financial position, results, or cash flows. No ceiling-test impairment was recorded for the periods presented.
Important facts for investors to verify
- Terms and financial effects of the October 2023 note exchange, including the higher 9.50% coupon, cash payment, and resulting debt maturity profile.
- Liquidity and covenant headroom, credit-facility availability and maturity, and the company’s capacity to fund planned capital spending and Suroriente commitments.
- Whether production growth can be sustained while controlling lifting, power, and transportation costs, and whether concentrated customer exposure changes.
- Oil-price, differential, tax, and foreign-exchange assumptions underlying management’s 12-month liquidity outlook.
- Non-GAAP measures such as adjusted EBITDA, funds flow from operations, and operating netback are company-defined and are not directly comparable across all issuers.